RBI hiked the repo rate by 35 bps to 6.25%.

 

• In December 2022 policy, RBI hiked the repo rate by 35 bps to 6.25%. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.

RBI's rate hike by 35 bps was a welcome move and a much-needed one too. The central bank has continued to hike the repo rate since May this year to tame stubbornly high inflation. It hiked the policy rate aggressively by 50 bps three times in a row from June to October. So when a much smaller size rate hike is given, it comes as a positive move, indicating that the peak inflation is behind us. So, does that mean is a likelihood of a pause in the repo rate

In December 2022 policy, RBI hiked the repo rate by 35 bps to 6.25%. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.50%.

So far in FY23, the central bank has increased the repo rate by 225 bps. The first hike was of 40 bps in May, followed by three consecutive 50 bps rate hikes between June to October, and the latest to be is a 35 bps hike earlier this week for December policy.

In October, CPI inflation moderated to 6.8% from the five-month high of 7.4% in September, due to favourable base effects mitigating the impact of a pick-up in price momentum. Also, food inflation softened.

RBI said, the inflation trajectory going ahead would be shaped by both global and domestic factors.

Sure, inflation has eased but let's not forget RBI has also kept its 'withdrawal of accommodation' stance unchanged -- hinting that the war to bring inflation to the tolerance limit is still not over yet. In fact, RBI also increased its inflation target for Q3FY23 and Q4FY23 slightly to 6.6% and 5.9% respectively compared to the October policy's trajectory of 6.5% and 5.8%. Overall, RBI's inflation target of 6.7% remained unchanged. Going forward, for Q1 of FY24, RBI kept its inflation target unchanged at 5%, however, the central bank expects consumer prices to rise to 5.4% in Q2 of FY24.

 

Currency in circulation now is almost double that in use just before demonetisation: Chidambaram

Reserve Bank of India (RBI) figures show ₹32.18 lakh crore currency in circulation now in India, almost double the ₹17.97 lakh crore of currency in use just before demonetisation in November 2016, senior advocate P. Chidambaram submitted before a Constitution Bench on Thursday.

CPI INFLATION 6.77 per cent in October 2022

 Government data released a few days ago showed that inflation had fallen to a three-month low of 6.77 per cent in October. Prior to that, inflation stood at 7.04 per cent in the second quarter (July-September), down from 7.28 per cent in the first quarter (April-June).

While this trend would suggest that perhaps inflation has peaked, it needs to be pointed out that this is the 10th straight month that inflation has remained above the upper threshold of the Reserve Bank of India’s (RBI’s) inflation targeting framework. The RBI is mandated to keep inflation at 4 per cent (plus/minus 2 per cent).

 

RBI Governor to meet bank CEOs over slow deposit growth

Reserve Bank Governor Shaktikanta Das will hold a meeting with CEOs of public sector banks on Wednesday to discuss issues concerning slow deposit growth and sustainability of high credit demand.

As per the Reserve Bank of India (RBI) data, deposits rose by 9.6 per cent as compared to 10.2 per cent on a year-on-year basis, while credit offtake witnessed a jump of 17.9 per cent as against 6.5 per cent a year ago.

Retail inflation may drop to 6.7% for October on favourable base, RBI sees no respite

 

Data on October retail inflation, which is set to stay above the central bank's target of 4 percent for the 37th month in a row, will be released on November 14

Headline retail inflation likely dropped sharply in October, the first month after the Reserve Bank of India (RBI) failed to meet its inflation mandate, but stayed above the central bank's 6 percent upper bound for the tenth month in a row.

According to a Moneycontrol poll of 16 economists, Consumer Price Index (CPI) inflation is expected to have fallen to 6.7 percent in October from 7.41 percent in September, thanks to a favourable base effect.

The Ministry of Statistics and Programme Implementation will release retail inflation data for October at 5.30 pm on November 14 but before that, it will release the industrial production data for September on November 11.

IIP growth

Industrial growth, as measured by the Index of Industrial Production (IIP), is seen rising to 2.3 percent in September from August's 18-month low of -0.8 percent, according to the median of estimates of 14 economists polled by Moneycontrol.

ORGANISATION	ESTIMATE FOR SEPTEMBER IIP GROWTH
Standard Chartered Bank	0.7%
IDFC First Bank	1.0%
Kotak Mahindra Bank	1.7%
CareEdge	1.8%
State Bank of India	1.8%
YES Bank	1.9%
Sunidhi Securities	2.2%
Bank of America Securities	2.4%
HDFC Bank	3.2%
Deutsche Bank	3.5%
L&T Financial Services	4.2%
Motilal Oswal Financial Services	4.3%
Bank of Baroda	4.7%
ICRA	5.1%

Data released on October 31 showed growth in India's eight core industries surged to 7.9 percent in September, up from 4.1 percent in August.

The performance of the core industries is key to industrial growth as they make up around 40 percent of the IIP.

"Many product groups across the manufacturing sector expected a noticeable improvement in the festival season that starts from Onam, covers Durga Puja, and ends with Diwali. It needs to be seen whether this momentum would sustain beyond the festive cheer," added Rupa Rege Nitsure, group chief economist at L&T Financial Services.

Inflation fall

While industrial output is seen rising in September, inflation is expected to have fallen by more than half-a-percentage point in October.

At 6.7 percent, economists' prediction for last month's inflation print would be the lowest since February, though inflation clocked in at 6.71 percent in July.

 

ORGANISATION	ESTIMATE FOR OCTOBER CPI INFLATION
Barclays	6.5%
Societe Generale	6.5%
Standard Chartered Bank	6.6%
Sunidhi Securities	6.62%
IDFC First Bank	6.65%
Kotak Mahindra Bank	6.66%
HDFC Bank	6.68%
ICRA	6.7%
CareEdge	6.7%
State Bank of India	6.71%
Bank of Baroda	6.8%
Bank of America Securities	6.8%
Deutsche Bank	6.8%
YES Bank	6.83%
L&T Financial Services	6.88%
Motilal Oswal Financial Services	7.1%

In October 2021, the base period for the forthcoming inflation number, the general index of the CPI jumped 1.4 percent month-on-month. Meanwhile, the index has increased, on average, by 0.5 percent month-on-month in each of the last four months. As such, a similar increase in the index last month will see inflation fall to 6.5 percent.

While inflation is set to decline, economists say the sequential price momentum continued in October.

"While food inflation is likely to moderate due to base effects, food prices still rose sequentially due to a spike in perishables such as vegetables, fruits and milk," noted Rahul Bajoria, chief India economist at Barclays.

Of the 22 food items for which the Department of Consumer Affairs compiles data, 15 saw a month-on-month increase in prices. This includes a 12 percent rise in the prices of tomatoes, a 7.6 percent rise in onion prices, and a 1.5 percent increase in milk prices.

According to Bajoria, food and beverage inflation likely eased to 6.7 percent in October from 8.41 percent in September.

Uncomfortably high

While headline retail inflation has come off appreciably from the near eight-year high of 7.79 percent in April, it remains uncomfortably high.

October will mark the entry of CPI inflation into a fourth year above the RBI's medium-term target of 4 percent. The last time inflation was under 4 percent was in September 2019, when it had come in at 3.99 percent.

It will also be the tenth straight month in which it will be outside the central bank's mandated 2-6 percent tolerance range. With the RBI's failure confirmed by the September inflation number of 7.41 percent, the Monetary Policy Committee (MPC) met last week to discuss the report the central must submit to the government.

A second successive failure of the RBI, which would occur if average CPI inflation is outside the 2-6 percent band in the next three quarters till April-June 2023, is, however, unlikely.

The RBI's latest forecast says inflation will average 6.5 percent in October-December 2022 and 5.8 percent in January-March 2023 before easing to 5.2 percent in FY24.

"…if the current trend persists, then CPI inflation is likely to average higher than RBI's forecast of 6.5 percent average for October-December 2022," noted Kaushik Das, Deutsche Bank's chief economist for India.

Das sees CPI inflation averaging 6.9 percent in both, the third quarter of FY23 and FY23, before easing to 5.5 percent in FY24.

 

Eurozone Inflation Reaches 10.7%, Breaks all Previous Records

The Eurozone recorded its 12th straight month of rising inflation. However, this time the number has reached new highs after the region witnessed a 10.7% increase, up form 9.9% in the previous month. This is the highest inflation rate that the region has ever observed, higher than the 10.2% projected number. At 12.8% year-over-year, headline inflation in Italy exceeded analysts’ predictions. Germany reported that inflation increased to 11.6%, while France reported a 7.1% increase. The various values represent policies adopted by national governments as well as the degree to which those countries are or were dependent on Russian hydrocarbons. Germany is heavily dependant on Russian energy. Given that winter, particularly a cold one this year, is just around the corner, Germany is put on the spot for its energy need    s.However, there are certain euro-zone countries where inflation increased by more than 20%, such as Estonia, Latvia, and Lithuania.

What is the central bank doing to curb inflation?

In an effort to lower costs, the European Central Bank confirmed more rate increases in the upcoming months. Last week, the ECB made the decision to increase interest rates by 75 basis points for the second time in a row. The chance of a recession in the euro zone has increased, according to ECB President Christine Lagarde, who spoke at a press conference.

However, there are certain euro-zone countries where inflation increased by more than 20%, such as Estonia, Latvia, and Lithuania.

What is the central bank doing to curb inflation?

In an effort to lower costs, the European Central Bank confirmed more rate increases in the upcoming months. Last week, the ECB made the decision to increase interest rates by 75 basis points for the second time in a row. The chance of a recession in the euro zone has increased, according to ECB President Christine Lagarde, who spoke at a press conference.

 

Rupee hits fresh low vs US dollar, may slide to ‘84 levels soon’

The Indian rupee fell to 83.06 in early trade today  as the surge in Treasury yields and the dollar index fuelled a broader decline in Asian currencies and equity markets. The rupee had hit a record low of 83.02 in the previous session. Asian equities tumbled today, tracking a sell-off on Wall Street, while the dollar regained its strength as surging inflation and interest rate hikes fears returned to the fore.

The selloff in U.S. Treasuries resumed on Wednesday, pushing near-maturity and longer-maturity Treasury yields to fresh multi-year highs. Yields had spiked despite a weak U.S. housing report.

The yield on the 10-year U.S. Treasury note touched a fresh 14-year high, brushing off a weak housing report. US 10-year yields were up at 4.139%.

Globally, equities are again under pressure after a fresh jump in US yields and another round of escalation over the Russia-Ukraine war. On the oil front, Joe Biden’s battle against higher oil prices continues after his administration announced the release of another 15 million barrels of oil from the Strategic Petroleum Reserve (SPR) extending the release through December," the forex advisory firm added. 

 

Core US inflation rises to 40-year high, securing big Fed hike

Consumer prices in the US rose more than expected last month in a sign that the inflation fight in the world's largest economy is far from over.

Inflation, the rate at which prices rise, was 8.2% in the 12 months to September, down from 8.3% in August.

Despite the fall, the figure was still higher than forecast.

Inflation in the US is being closely watched as the US central bank's efforts to tame the problem push up the dollar and global borrowing costs.

The rate is well above the central bank's 2% target and means the Federal Reserve is likely to continue to keep raising interest rates in an attempt to cool rising prices.

"The Fed needs to react at the next meeting and continue to keep policy tight until there is some sign that inflation is under control," said Neil Birrell, chief investment officer at Premier Miton Investors.

This print raises the level of uncertainty and is bad news for the economy overall, but for consumers in particular. The peak in interest rates will, in all probability, be higher now. It's difficult to find any positives in this for the economy or markets."

Inflation in the US has dropped back since hitting 9.1% in June, helped by a fall in fuel prices at the pump.

Costs for clothing and used cars also dipped last month.

But the issue continues to affect other parts of the economy. Grocery prices have jumped 13% over the past 12 months, and housing and medical costs are also rising sharply.

Excluding food and energy, inflation jumped 6.6% - the fastest rate since 1982.

"The composition of the inflation reading is perhaps even more worrisome than the overall number," said Seema Shah, chief global strategist of Principal Asset Management.

"Increases in shelter and medical care indices... confirm that price pressures are extremely stubborn and will not go down without a Fed fight."

The Federal Reserve has already raised interest rates five times since March, opting for unusually large hikes in recent months that have unsettled financial markets and led to sharp slowdowns in sectors like housing.

By making borrowing more expensive, the Fed is hoping to reduce demand, especially for big ticket items such as cars and homes, and ease the pressures pushing up prices.

But by slowing activity, the Fed also risks tipping the economy into a recession. Analysts see that outcome as increasingly likely, since inflation has proven stubbornly resistant to the Fed's efforts so far.

With midterm elections looming in November, President Joe Bien has tried to make the case that the slowdown in economic activity is a healthy shift from the growth surge that followed the pandemic, pointing to robust job creation and low unemployment.

"I don't think there will be a recession. If it is, it'll be a very slight recession", he said in an interview this week.

But concerns about the economy have weighed on the Democrats.

"Americans are squeezed by the cost of living: that's been true for years, and they didn't need today's report to tell them that. It's a key reason I ran for President," he said following Thursday's inflation report.

"Today's report shows some progress in the fight against higher prices, even as we have more work to do."

 

Rupee dives to another record low against US dollar

The Indian rupee continued to extend its recent slide versus the US dollar today after the solid US jobs report cemented bets of more large Federal Reserve rate hikes. The rupee fell to a record low of 82.66, down from 82.33 from the previous session.

Data on India's retail inflation, which is expected on Wednesday, likely accelerated to a five month high of 7.30% in September due to surging food prices, a Reuters poll found. A Reuters poll of 47 economists suggested inflation - as measured by the Consumer Price Index - rose to an annual 7.30% in September from 7.00% the previous month.

HOW FEDERAL BANK CREATES BUBBLES AND BUST.......

 See, post 2020, we have realised that the biggest fund managers are the Fed, they have $8 trillion, what they do, besides what happens to the markets. So, when the economy was in very bad shape in 2020, we saw the markets going up because of Fed actions at that point in time. Jerome Powell kept saying they want to create inflation, and that resulted in a very bullish market. Now the Fed and their governors are saying they want to crush inflation. So we are in a global market where the biggest fund manager, the Fed, is stressing that it wants to crush inflation so the markets keep coming down.

Growth in credit offtake at 9-yr high

 

Growth in credit offtake at 9-yr high, with retail driving demand

Bank credit grew at 16.2 per cent in the fortnight ended September 9, the highest in about nine years, aided by revival in the economic activity post-Covid, increased working capital demand, rising discretionary spending and low-base effect.

credit rose 16.2 percent to Rs 125.5 lakh crore as of September 9'22 over last year's levels. This is reckoned to be the highest growth in more than eight years and more than double the pace of 6. per cent growth in September'21.23-Sept-2022

We expect credit demand to remain high but think the financial system will scramble for resources to fund credit growth. Consequently, there could be pressure on deposit rates in the coming few months,” said Suresh Ganapathy & Param Subramanian of Macquarie Research in a recent report.

rCedit offtake saw a 16.2 per cent year-on-year robust growth, expanding by a significant around 948 basis points (bps), for the fortnight ended September 9, 2022. The growth is nearly the highest in the last 9 years (16.3 per cent credit growth: October 18, 2013),” said Saurabh Bhalerao, associate director—BFSI research, Care Ratings. A basis point is one hundredth of one percentage point

This rise in demand for loans has been driven by sustained retail and improving wholesale credit, which is likely to continue the rest of the fiscal, experts said. “There is a pick-up in the economy and we are seeing normalcy coming back in all the sectors post-Covid. The discretionary spending in the retail segment, which were being postponed, are now being bunched up. The demand for working capital demand from corporates has started,” said Suresh Khatanhar, deputy MD, IDBI Bank.

The growth in credit has been on an upward trajectory since the latter half of FY22 and has been in double digits since April 2022, despite a 140-basis point hike in repo rate — the rate at which the RBI lends money to banks to meet their short term funding needs — since May this year.

Bankers said that with hardening of bond yields, corporates are now shifting to banks from the capital market for their funding requirements.

“Earlier, when the interest rates were lower, corporates preferred the bond market route to raise funds. However, with the reversal in bond yields, they are now shifting to banks,” said Khatanhar.

The 10-year bond yield has increased to 7.35 per cent as on September 26, from around 7.24 per cent on September 2.

Credit growth has remained over 15 per cent for three consecutive fortnights now, indicating a sustained pick-up in demand. For the fortnights ended August 26 and August 12, banking credit grew at 15.5 per cent and 15.3 per cent, respectively.

But deposit growth has been trailing growth by a large margin. Deposits in the banking system grew 9.5 per cent YoY for the fortnight ended September 9. The credit-deposit gap has widened to 670 basis points and the widening gap has exacerbated concerns that slow deposit growth may emerge as one of the biggest constraints for loan growth in the system.

With liquidity in the system tightening, banks are expected to get aggressive in garnering deposits to support credit demand in the system. This is also expected to move the needle on deposit rates, which have not moved in tandem with lending rates. Earlier this week, liquidity in the banking system slipped into a deficit mode for the first time in over three years, signalling a structural shift away from loose financial conditions in the economy.

Credit growth has seen sustained a rise since April this year, despite the RBI adopting a tighter monetary policy stance. The RBI’s six-member Monetary Policy Committee has increased the benchmark repo rates by 140 basis points since May this year and consequently, the banks have increased their external benchmark linked loans by the same proportion